Senate

Senate Finance Committee

The Senate Finance Committee Republican staff previously released draft reports proposing tax reform. The 2014 release of the “Comprehensive Tax Reform for 2015 and Beyond” analysis report proposed tax reform and listed like-kind exchanges as the third largest expenditure, but did not call for a repeal of §1031. The 2013 “Cost Recovery and Accounting Tax Reform Discussion Draft” called for the repeal of §1031 like-kind exchanges. The 2013 discussion draft was released as a set of tax reform proposals.

Senate Finance Committee Republican staff released an in-depth analysis report titled, “Comprehensive Tax Reform for 2015 and Beyond.” This proposal does not call a repeal of §1031, but lists like-kind exchanges as the third largest tax expenditure for corporations in 2014. In the press release about the report, Senator Hatch said, “This report is intended to provide background on where we are and where we have been with regard to our tax system as well as some possible direction on where our reform efforts should go in the near future.” Representative Dave Camp (R-Mich.) introduced bill H.R. 1 in the House on the same day.

Legislative Excerpts

Excerpt from Committee Draft

Senate Finance Committee Cost Recovery Draft

Repeal of like-kind exchanges (sec. 15 of the discussion draft and sec. 1031 of the Code)

Present law: An exchange of property, like a sale, generally is a taxable event. However, no gain or loss is recognized if property held for productive use in a trade or business or for investment if exchanged for property of a “like-kind” which is to be held for productive use in a trade or business or for investment.113 In general, section 1031 does not apply to any exchange of stock in trade or other property held primarily for sale; stocks, bonds or notes; other securities or evidences of indebtedness or interest; interests in a partnership; certificates of trust or beneficial interests; or choses in action.114 The nonrecognition of gain in a like-kind exchange applies only to the extent that like-kind property is received in the exchange. Thus, if an exchange of property would meet the requirements of section 1031, but for the fact that the property received in the transaction consists not only of the property that would be permitted to be exchanged on a tax-free basis, but also other property or money, then the gain to the recipient of the other property or money is to be recognized, but not in an amount exceeding the fair market value of such other property or money. Additionally, any gain realized on a section 1031 exchange must be recognized to the extent that the gain is subject to the recapture provisions of sections 1245 and 1250. No losses may be recognized from a like-kind exchange. If section 1031 applies to an exchange of properties, the basis of the property received in the exchange is equal to the basis of the property transferred. The basis is increased to the extent of any gain recognized due to the receipt of other property or money in the like-kind exchange, and decreased to the extent of any money received by the taxpayer. The holding period of qualifying property received includes the holding period of the qualifying property transferred, but the non-qualifying property received is required to begin a new holding period.

Provision: The provision repeals section 1031, which provides for nonrecognition of gain in the case of like-kind exchanges. However, limited deferral for pooled property is achieved by operation of the pooling regime.

Effective Date: The provision applies to exchanges made in taxable years beginning after December 31, 2014.

Pooling Provision

Explanation of Provision In General: The provision repeals present-law depreciation rules under section 168 and replaces such rules with a pooling cost recovery system for “pooled property” (e.g., most tangible property and computer software) and a straight-line cost recovery system for “straight-line property” (i.e., real property and personal-use passenger automobiles) (collectively, “section 168 property”). The term “section 168 property” does not include motion picture films, video tapes, or sound recordings.55

Pooled property

In general In the case of pooled property, costs are recovered by multiplying the applicable recovery rate for each pool by the associated pool balance at year-end. “Pooled property” is defined as any tangible property (other than any personal-use passenger automobile) and any computer software (as defined in section 197(e)(3)(B) that is not an amortizable section 197 intangible) assigned to any one of the four pools.

The Senate Finance Committee has asked for comments.

The like-kind exchange rules are repealed. For pooled assets, the like-kind exchange rules are replaced by the inherent deferral mechanism of the pooling regime.

The staff discussion draft proposes to repeal the like-kind exchange rules. For pooled assets, the like-kind exchange rules are replaced by the inherent deferral mechanism of the pooling regime, but no such analog exists for real property or intangible property in the draft. Comments are requested regarding whether the like-kind rules should be retained in some fashion for real property and intangible property and whether, if retained, the rules should be revised to require a “similar use” concept (such as in the involuntary conversion rules) in place of the “like-kind” concept.

References

Section 1031 Complements Tax Reform, Adds to Growth

IRC Section 1031 like-kind exchanges help a taxpayers at all levels expand their businesses and invest for the future, with a significant positive impact on economic growth. Like-kind exchanges are used widely in the real estate, transportation, agriculture, conservation, equipment leasing, rental vehicle and construction industries. Section 1031 contributes significantly to American jobs, investment, tax revenue, and the health of the U.S. economy.

Section 1031 complements expected tax reform proposals, such as the House Republican Blueprint, and should be retained in its present form. Economic studies found that limiting or repealing like-kind exchanges would result in economic contraction and job loss.